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Review of Industrial Organization

Erschienen in:

30.10.2017

Recent Developments at the CMA: 2016–2017

verfasst von: Chris Doyle, Alex Moore, Borbala Szathmary, Mike Walker

Erschienen in: Review of Industrial Organization | Ausgabe 4/2017

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Abstract

We discuss three interesting cases that the Competition and Markets Authority (CMA) has dealt with over the past year. First, we cover the ICE/Trayport vertical merger, which was prohibited by the CMA. Second, we discuss the CMA’s recent market investigation into the UK energy sector. The CMA arrived at the unexpected finding that markets with homogeneous products, multiple players and low entry barriers can still lead to significant competition concerns. Finally, we discuss the CMA’s work in relation to retail most favoured nation clauses, and include econometric results showing the impact of these clauses on platforms’ commission fees .

Vorheriger Artikel Recent Developments at DG Competition: 2016/2017

Nächster Artikel Economics at the FCC, 2016–2017: Auction Designs for Spectrum Repurposing and Universal Service Subsidies

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The CMA works alongside a number of sectoral regulators, including Ofcom (communications), Ofgem (gas and electricity), Ofwat (water), the Financial Conduct Authority, the Office of Rail and Road, the Civil Aviation Authority, the Payment Systems Regulator, and the Northern Ireland Authority for Utility Regulation.

For a full description of the CMA’s duties see its website at https://www.gov.uk/government/organisations/competition-and-markets-authority.

All economists nevertheless report to other economists.

This includes Phase 2 mergers, market investigations and antitrust cases following the issuing of a Statement of Objections.

See the case page at https://www.gov.uk/cma-cases/investigation-into-agreements-in-the-pharmaceutical-sector.

See the case page at https://www.gov.uk/cma-cases/investigation-into-the-supply-of-pharmaceutical-products.

Full details, including the CMA’s final report, are available on the case page: https://www.gov.uk/cma-cases/intercontinental-exchange-trayport-merger-inquiry.

These are typically grouped into four key asset classes: gas, power (i.e., electricity), coal, and emissions permits, though further subdivisions exist: e.g., UK gas, Dutch gas.

Clearing is the process of managing the actions between trade date and settlement date, and ensures that the terms of the contract entered into by the parties to the trade are fulfilled through to delivery. The clearinghouse interposes itself between the two trading parties and thereby take on the counterparty risk from the trading parties.

Traders who execute trades at brokers have more flexibility, and can choose whether to use ICE’s clearinghouse, one of its rival clearinghouses, or to not use a clearinghouse at all.

Several of these pieces of software also provide a range of back-end functions to support venues’ operations, such as a matching engine that pairs buyers and sellers together.

Trayport also provides software that allows trade information to flow seamlessly from brokers to clearinghouses.

The CMA also assessed a second concern: that Trayport could be used to foreclose rival clearinghouses when they compete to clear trades that are executed at brokers. For those trades that continue to remain executed with a broker, and where the trader has a choice of clearinghouse, control of Trayport might be used to help ICE to gain additional clearing volumes.

While brokers also undertake some voice trading, the CMA found that this was not a strong alternative to electronic trading because it is not scalable or efficient for high volume markets. Moreover, there was little evidence of significant voice-only trading, as most of the voice trading that did occur was in the form of ‘hybrid’ trading that also involved some use of Trayport.

This excludes ICE’s own direct screen, as this would also be under the control of the merged firm.

When traders use a clearinghouse, they need to post collateral, which comes at a cost to them. However, traders that lodge many trades with the same clearinghouse may benefit from a discount on their collateral requirements, as the clearinghouse can net-off many of these offsetting positions against one another. The magnitude of this discount depends on the extent to which the market prices of the various traded products are correlated with one another; and critically the CMA found a fairly high degree of price correlation, and therefore margin offsetting, between different energy asset classes: e.g. gas and power.

For example, while exchange trading is fully electronic, automated, and standardised, brokers have the capability to match trades that are more bespoke in nature, or to call traders and act as a negotiator to help arrange a trade.

This is particularly in the context of the electronic broker trading that takes place on Trayport, where many products are highly standardised and liquid, and therefore particularly suitable for exchange trading.

There had been large increases in total trading volumes, which meant that it was not possible to be certain if a change in the relative proportion of trading taking place at exchanges was because individual traders had switched, or because there had been a larger increase in exchange trading.

Market participants emphasised that energy trading evolves dynamically over time, with individual products’ transitioning from fragmented illiquid voice-broking to standardised and liquid exchange trading.

A range of approaches and assumptions were used to provide an indicative estimate of the cost of foreclosure, for example that it may experience a 10-20% loss in Trayport’s profits.

The UK authorities have imposed structural remedies in previous merger cases that raised vertical concerns, including London Stock Exchange/Deutsche Börse AG/Euronext NV and BBC Worldwide Ltd/Channel Four Television Corporation/ITV plc.

Competition Appeal Tribunal, Intercontinental Exchange, Inc v. Competition and Markets Authority and Nasdaq Stockholm AB, Judgement, para 114.

Competition Appeal Tribunal, Intercontinental Exchange, Inc v. Competition and Markets Authority and Nasdaq Stockholm AB, Judgement, paras 245-246 and 268.

For the Final Report, see CMA (2016a).

At the start of the inquiry, the Chief Economist of the CMA, Dr. Mike Walker, confidently informed the CEO of the CMA that whatever competition problems there were would be found upstream. As he noted, the number of suppliers at the retail level and the ease of entry meant that there could not possibly be any market power downstream. The evidence has not entirely borne out this prediction.

Indeed, the economist Professor George Yarrow resigned from the Board of the energy regulator in protest at the decision.

Formally, the prohibition on geographic price discrimination ended in 2012. However, the regulator warned suppliers “against practices which are unjustified … returning to the market”. The suppliers took this as meaning that reintroducing geographic price discrimination would lead to renewed regulatory intervention.

On average a pre-payment meter user on a SVT could save £70 per year by switching to a fixed term contract. This was much lower than the £200-£250 per-year savings that were available to SVT customers paying via direct debit or standard credit terms.

The established pre-payment infrastructure was built in the 1990 s and is technically only able to support a limited number of tariffs.

These clauses are sometimes referred to as across platform parity agreements (APPAs).

Following the market study, the CMA launched a competition enforcement case into MFNs in the home insurance sector. See https://www.gov.uk/cma-cases/price-comparison-website-use-of-most-favoured-nation-clauses.

See http://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2013/26_11_2013_Amazon-Verfahrenseinstellung.html and https://www.gov.uk/cma-cases/amazon-online-retailer-investigation-into-anti-competitive-practices.

See e.g. https://www.gov.uk/cma-cases/hotel-online-booking-sector-investigation.

Amazon itself is also a retailer of products, and some of the products that are sold by Amazon directly compete with products that are sold by suppliers on Amazon Marketplace.

Wide MFNs may also facilitate collusion between platforms and/or suppliers (see, e.g., the European Commission’s E-books case from 2013 (http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52013XC1224(04)). These collusive theories of harm were not pursued in the Amazon case. The fragmented nature of the supplier market (with thousands of small sellers) made collusion between suppliers unlikely, and there was no indication of platforms’ using MFNs to facilitate collusion either.

DCTs were referred to as price comparison websites or PCWs in the PMI market investigation.

We did not carry out similar analysis in the other insurance sector we considered in the market study (home insurance) because wide MFNs were still in place in this sector at the time of the study.

The commissions data were available from each DCT (j) for each brand (i) for each year (t). As this estimates a difference-in-differences model, DCT-brand fixed effects (δ _ij) are included together with year fixed effects (δ _t).

We found that average commissions were approximately the same for brands with a narrow and wide MFN, although this was driven by one DCT that used only narrow MFNs throughout the whole period. Looking only at those DCTs that used both narrow and wide MFNs, average commissions were around £3 higher for brands with wide MFNs. Excluding this DCT did not meaningfully affect our baseline regression results.

The insurance “group” is the larger corporate organisation to which the brand belongs. A large insurance group for example may have multiple brands, and it is likely that it is the size of the overall group that determines the bargaining power of the insurer.

Without controlling for the size of the DCT, the marketing variable is positive and significant. These results are omitted for brevity.

Boik, A., & Corts, K. (2016). The effects of platform MFNs on competition and entry. Journal of Law and Economics, 59(1), 105–134.CrossRef

Competition and Markets Authority. (2014a). Private motor insurance market investigation: final report. Retrieved October 3, 2017 from Competition and Markets Authority website: https://www.gov.uk/cma-cases/private-motor-insurance-market-investigation.

Competition and Markets Authority. (2014b). Aggregates, cement and ready-mix concrete market investigation: final report. Retrieved October 3, 2017 from Competition and Markets Authority website: https://www.gov.uk/cma-cases/aggregates-cement-and-ready-mix-concrete-market-investigation.

Competition and Markets Authority. (2016a). Energy market investigation: final report. Retrieved October 3, 2017 from Competition and Markets Authority website: https://www.gov.uk/cma-cases/energy-market-investigation.

Competition and Markets Authority. (2016b). Retail banking market investigation: final report. Retrieved October 3, 2017 from Competition and Markets Authority website: https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk.

Competition and Markets Authority. (2017). Digital comparison tools market study: final report. Retrieved October 3, 2017 from Competition and Markets Authority website: https://www.gov.uk/cma-cases/digital-comparison-tools-market-study.

European Competition Network. (2017). Report on the monitoring exercise carried out in the online hotel booking sector by EU competition authorities in 2016. Retrieved October 3, 2017 from European Competition Network website: http://ec.europa.eu/competition/ecn/.

Johnson, J. (2017). The agency model and MFN clauses. Working paper, Cornell University.

Titel: Recent Developments at the CMA: 2016–2017
verfasst von: Chris Doyle
Alex Moore
Borbala Szathmary
Mike Walker
Publikationsdatum: 30.10.2017
Verlag: Springer US
Erschienen in: Review of Industrial Organization / Ausgabe 4/2017
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-017-9594-8

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